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Identifying the Food Chain of the Market

Identifying the Food Chain of the Market. Predator or Prey ?. Market Wildlife Hunter, Gambler and Parasite.

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Identifying the Food Chain of the Market

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  1. Identifying the Food Chain of the Market Predator or Prey ?

  2. Market WildlifeHunter, Gambler and Parasite • Hunter- Identifying inefficiencies and systematically stalking them. Remains acutely sensitive to the possibility of being stalked by a yet more powerful predator. Relies on constant “hypothesis testing” to be forewarned of changing conditions. • Gambler- typically a “Black Box” investor hoping the recent past can be projected into the future. Failures of VAR etc. • Parasite- typically a “Modern Portfolio Theorist, who believes Markets are efficient yet tries to charge active fees for nearly passive management.

  3. Market Inefficiencies • Structural – Some market participants are innately better informed. • Time frame- Market participants do not have the same investment horizons. • Analytical- Mean Reversion is a definition of price history not one of innate value.

  4. Structural InefficienciesWhy are some investors better informed? • “Being in the Flow”, whether of Primary or Secondary market Key. • Quality of Research. • The Power of an Institution is reflected both in its access to information, and also via “reflexivity”, its power to create information. • Shifts in “Business Model” paradigm are reflected in shifts in the “Food Chain”.

  5. Understanding one’s Position in the Food Chain Key. • When markets are inefficient some participants inevitably benefit to the cost of others participants. • Are you Prey or Predator? • Seek Market Places and Environments which play to ones structural strengths. • Be aware of, and expect changes in the Market Places over time, altering the “Food Chain”.

  6. Particular Examples • The “Salomon” Investment Bank model 1972-1997, followed by the “pass the parcel” Banking model 1998-2006. • Capital Markets used as a weapon in the “Cold War” fighting for US$ Hegemony 1973-1991. • The Growing and malign influence of “Consultants” has undermined independent decision making of Fund Managers. Structural asset allocation decisions are made which consign clients to the bottom of the “Food Chain”, and to the role of “Gamblers” and “Parasites”. • Rigid adherence to “Indices Culture” promotes “Herd Mentality” and victim behaviour.

  7. Conclusions • The future is rosy for unleveraged independent managers of Capital. As a very scarce resource, a significant premium should be extracted for its deployment. • Free Capital will become a price maker rather than price taker. • An essential component of success will be to think and act like a Predator.

  8. Further Conclusions • Traditional “Risk management” is of second order importance to a prime predator. VAR is a fig leaf too insubstantial to keep Market Participants off a “Financial Sex Offenders Register” for poor practice. Constant “Hypothesis Generating and Testing” is the only “Scientific” approach. Benchmarks should be largely abandoned in favour of looking directly at each clients liabilities, risk tolerance and financial aspirations. • “MPT” should be ridiculed for promoting mediocrity. Understanding how to seek Strategic advantage and to avoid disadvantage is the only way forward. Understanding that advantage is subject to alteration over time means that Fund Managers need to have sufficient Structural flexibility to change their methods and value propositions over time. Bring Back “Balanced Mandates” and understand the decision making dead end of bureaucratic dirigism on investment decision making.

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